Cleantech VC and the state of the IPO market

A couple weeks back cellulosic ethanol hopeful Mascoma quietly pulled its IPO after it had filed to go public. It’s safe to say that the abysmal performance of the 2011 crop of biofuels IPOs, that included Solazyme, Gevo and Kior, did not help Mascoma’s chances of finding public money. Gevo’s been a particular stinker, losing over 80 percent of its value, though Kior is down almost 70 percent from its IPO pricing.

My colleague Katie Fehrenbacher has analyzed the various issues related to high levels of risk and companies like Kior. With no revenue at IPO and no significant revenue on the horizon until the company built a capital intensive production facility costing tens of millions, Kior has carried a significant level of risk for a publicly traded company.

I mention the high risk world of biofuel investing and the fact that these companies went to public markets seeking capital because two years after the 2011 class of biofuels IPOs, cleantech investors find themselves in challenges situations where it’s difficult get IPOs done. And without those investors having access to liquidity and returns, late stage companies are having harder times finding capital to push through the commercialization phase of growth.

What happened?

The IPO market all but dried up with just three cleantech IPOs in 2012 and overall cleantech VC dropped by a third. IPOs are critical for venture investors to find liquidity and produce returns, as is significant M&A activity. But IPOs that significantly underperform the market make it harder for other companies in that sector to attract VC or to go public themselves.

Of greatest concern is that as financing for cleantech gets tight, the brightest startups will struggle to find early stage capital and those companies nearing the path to commercialization will find it hard to find scaling capital.

Many of these financing issues are cleantech specific. It’s worth looking at Matthew Nordan’s analysis of the state of cleantech investing but some of the key points he makes are:

1) The current value of cleantech funds is about 90 percent of what LPs put into those cleantech specific funds, versus about 123 percent for the overall venture sector.

2) The number of cleantech IPOs is lagging and their aftermarket performance is poor.

3) Cleantech companies tend to take longer to IPO or get acquired and require more capital to get to profitability than say, internet startups.

IPOs and long term investors

So what to do about the problem? I spoke recently with Mona Defrawi, the founder of Equidity, a startup that has built a platform to connect promising later stage startups with buy side investors. These are the investors who would typically buy IPOs, but who now are getting access to data on later stage startups so they can consider investing in growth companies a couple years pre-IPO at attractive valuations while giving up some liquidity by doing private deals.

Defrawi has some strong opinions about how the overall IPO system is broken, much of which she blames on decimalization, short term trading, Sarbanes Oxley, and the inability to have stable markets post IPOs because there aren’t enough long term investors sticking by companies through an IPO. The net result is a world where it takes close to ten years to go public versus about 5 years in the 90s, something that has a rough impact on venture capital firms that need liquidity and need to show LPs a return. Defrawi put together an infographic to detail her view of the IPO market and to promote Equidity:

Equidity launched its list of 135 GrowthSTARS in February. These are companies that Equidity wants to be the foundation of its list of companies that it can connect with long term investors pre-IPO. Scanning the list, it included a few cleantech names such as Bloom Energy, Opower, oDesk, and BrightSource. Some of the companies on the list, like Opower, I wouldn’t think would have any trouble finding capital given its continued success. Though other names like BrightSource, which specifically has had to ditch its IPO plans as it struggles with the competitive move to solar PV technology, may need capital to survive before it ever reconsiders a public offering.

But regardless of how attractive the various companies on Equidity’s list are, the real point of interest is that Equidity wants to offer up these companies to buy side investors before the IPO, particularly in a world where venture capital has grown somewhat tight.

There are other efforts to increase liquidity pre-IPO from the likes of SecondMarket and AngelList. Equidity is another such effort though it’s trying to do so at a much larger investment size and not with a focus on making a market pre-IPO but on bringing the big public investors into private deals pre-IPO.

And if Equidity is one small step toward making it easier for cleantech companies to get later stage capital and attract investors that will stick with the company post-IPO, that could aid a recovery in the upstream venture capital that’s needed to finance the next generation of cleantech startups.